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Hi,
Assuming that timing the market (sell high, buy low) is near to impossible, is portfolio rebalancing the only and/or best way to consolidate your (paper) gains when your holdings have been performing well and you would also want to protect yourself from the next downturn?
Are there other options?
If you rebalance, how frequently do you do that? I guess doing it too often might curb your gains?
And, for this reason, do you always hold some cash in your portfolio as a risk free (safe) asset, or fixed income might suffice?
Thank you for your answers.

I think the implication was for consistently under performing funds over a period of time not the difference between 2% in one sector/region over a few months. As an example, at the moment I'm considering my holding in Fidelity Asian Values in my ISA account and whether I should switch to Invesco Asia Trust or Schroder Asia Pacific Trust. Its done well long term but I'm just not sure about whether its the right investment for me in that region in the future.

Don't confuse yield (the proportion of the share price paid as dividends) with growth (increase in share price) or total return (the product of both). Many companies, or investment companies, with good share price growth pay little or no dividend

Quite. You have to look at the total return which, to me, is the only thing that matters. I'd rather invest in companies like Unilever and Diageo than Glaxo which is sustaining dividends by paying them out of borrowed money. It's yielding 6% but the shares are down 15% over 5 years. And still income fund managers are buying it.

Why would you own a poorly managed fund at all?.......well in fact the majority of people who own managed funds could describe them as poorly managed if they fail to beat their benchmark. If you use tracker funds and reallocate between broad asset classes you are just going with the cyclical nature of say bonds vs equities and really the only "management" decision is your initial ratio of equities to bonds and the trigger point for the rebalancing.

I think the implication was for consistently under performing funds over a period of time not the difference between 2% in one sector/region over a few months. As an example, at the moment I'm considering my holding in Fidelity Asian Values in my ISA account and whether I should switch to Invesco Asia Trust or Schroder Asia Pacific Trust. Its done well long term but I'm just not sure about whether its the right investment for me in that region in the future.

Well as I said it has done well for me over a period of time, however I am leaning towards a switch because I feel the large Asian technology companies will continue to perform well. FAS is more focused on value smaller companies, which is fine, so its just down to personal preference on the overall holdings sector/regions of each trust

Well as I said it has done well for me over a period of time, however I am leaning towards a switch because I feel the large Asian technology companies will continue to perform well. FAS is more focused on value smaller companies, which is fine, so its just down to personal preference on the overall holdings sector/regions of each trust

So this isn't really rebalancing or consolidation.....it's a change in investment strategy going from asian value/small cap towards more asian large cap. That's something I've never even thought about.

I thought that by rebalancing you are in a way forced to sell (high) some of your good holdings and to buy more in your underperformers that will automatically turn out to be chaep-ish. In a bull run the underperformers could be cash,gold, fixed interest. I was asking about gain cristallization rather than strategy changes.
Thank you

I thought that by rebalancing you are in a way forced to sell (high) some of your good holdings and to buy more in your underperformers that will automatically turn out to be chaep-ish. In a bull run the underperformers could be cash,gold, fixed interest. I was asking about gain cristallization rather than strategy changes.
Thank you

That's the usual way rebalancing is thought of. As retirement gets closer people often also move away form equities to less volatile fixed income assets, the extreme being buying an annuity....that's the ultimate in consolidation.

The momentum approach where you buy more of the good performers sounds to me like "selling low and buying high", but it's advocates will point you to research papers that show that such an "inverse rebalancing" strategy produces excellent results as more often than not previous winners will be future winners. Of course try telling that to Woodford's investors.

So this isn't really rebalancing or consolidation.....it's a change in investment strategy going from asian value/small cap towards more asian large cap. That's something I've never even thought about.

We know you wouldn't think about it since you kindly tell us your investment strategy on a daily basis. For us active folk growth/value, small cap/large cap are issues we consider. It gives us something to worry about .

We know you wouldn't think about it since you kindly tell us your investment strategy on a daily basis. For us active folk growth/value, small cap/large cap are issues we consider. It gives us something to worry about .

Yes, I can't imagine what that must be like, but more seriously it isn't really rebalancing or consolidation. To me those concepts imply a feed back loop to get back to an initial allocation between asset classes or funds which often have different amounts of risk/volatility and maybe a strategy to eventually de-risk.

I thought that by rebalancing you are in a way forced to sell (high) some of your good holdings and to buy more in your underperformers that will automatically turn out to be chaep-ish. In a bull run the underperformers could be cash,gold, fixed interest. I was asking about gain cristallization rather than strategy changes.

Not necessarily underperformers. You expect some asset classes (and funds within classes) to outperform others so if, eg you want a 60/40 equity/bond split so in a rising market you would expect to periodically sell equities to get your bonds back to 40%. Now if only there was a type of fund that did that for you automatically...

Last edited by aroominyork; 16-05-2018 at 4:53 PM.
Reason: Added 'so in a rising market'

I think we are a lot older than you, 60+, so we wanted to ensure that crash or no crash we were bomb proof.
"Glide path with gold" is not a retirement plan the usual suspects market. To be considered in the future on a need to consider basis.
Best of fortune..._

First of all,3 months isn't long enough to know that, 3 years maybe, and secondly if for example you went into a sector, such as s Asia, it woudl be ridiculous to get out it 3 months later on the grounds that say US had risen in the meantime but Asia was down.

Growth companies are at historical highs pretty much all of the time. How do you know when the top is. Then, should you decide to sell and look for another company to buy how can you tell if that one will grow at a greater rate. Its difficult to judge. I leave up up to the fund managers...

...so if we trust the fund manager we have to assume that they have a better idea of the high point of a growth company and when its best to decrease exposure to it and move on. If you take SMT as an example i think we can safely say that they assume that Amazon, Tencent, Alibaba and Tencent are nowhere close to being finished as high growth companies. To invest in SMT you would have to agree

But if an individual share is at a 10 year historical high then surely this is screaming "sell" and capture the gains because if it then turns down and ticks over at its typical price which may be 30% less then it would take years to recoup what you might have banked by selling on the high, via dividend income?

SMT maybe soon the managers of SMT will also decide to sell their stakes in the companies you mention because they may feel they have peaked. They will then go buy something else?

In 2009 the NAV for SMT was about 100 pence. Now its about 490 pence.

Where did all that extra value come from ? Is it a bubble? If i buy today and it pops, ill be left holding a decent loss...

Leaving aside the normal up and down blips and corrections, is the trend truly always onward and upward? I guess it must be with costs and inflationary feed throughs behind it all.

Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..

But if an individual share is at a 10 year historical high then surely this is screaming "sell" and capture the gains because if it then turns down and ticks over at its typical price which may be 30% less then it would take years to recoup what you might have banked by selling on the high, via dividend income?

Stocks are on a 10 year high all the time. Today, many stocks in the world are at all time highs. There is no typical price for a stock - simply what its worth right now to another buyer.

“

SMT maybe soon the managers of SMT will also decide to sell their stakes in the companies you mention because they may feel they have peaked. They will then go buy something else?

”

They may do if they believe that the company has peaked for the time being. More likely they keep it and invest more in other areas, gradually reducing the percentage holding.

“

In 2009 the NAV for SMT was about 100 pence. Now its about 490 pence.

Where did all that extra value come from ? Is it a bubble? If i buy today and it pops, ill be left holding a decent loss...

”

Ok so lets take Amazon, SMTs biggest holding. Its June 2009, just one year after the finacial crisis and its back to pretty much its all time high of $85. 3 years later in 2010 its worth $120. By June 2013 its worth $277. By 2016 $715 and today $1587. Thats where the value comes from. They have a number of other stocks in various stages of this type of growth. At what point would you sell Amazon to consolidate? Its an unknown. However i think its fair to say that its unlikely that Amazon do something to cause a 95% drop back to under $85.

“

Leaving aside the normal up and down blips and corrections, is the trend truly always onward and upward? I guess it must be with costs and inflationary feed throughs behind it all.

”

In general yes. Not all companies are growth companies though. Some do tend to hover about a range for many years (usually the high dividend payers) but its still hard to predict if and when they will break out and not return to that range. Unless you are seriously into reading up about the individual companies, how they operate and make money and reading all the financials, you will always be behind someone else that has. That doesn't stop many people having a point of view though. I'm sure lots of people sell a stock because they think it is too expensive - to someone else who thinks it it too cheap.

But if an individual share is at a 10 year historical high then surely this is screaming "sell" and capture the gains because if it then turns down and ticks over at its typical price which may be 30% less then it would take years to recoup what you might have banked by selling on the high, via dividend income?

that depends. compared to 10 years ago, is the company making much higher profits, from much higher turnover, with much higher free cash flow, and paying much higher dividends? or are all those numbers about the same as 10 years ago?

if the numbers are all about the same, then the share price may well go through up and down cycles, with no real upward trend. but if the numbers are growing, you'd expect a general upwards trend in the shares price, combined with some up and down cycles, which may translate into a share price which mostly goes up, but with occasional pull-backs.

this does come back to inflation (as you mentioned, further down) and to economic growth. however, some companies benefit from this growth, others don't, or even shrink. and of course some benefit for a while, but circumstances change, and then they don't (e.g. think of kodak).

however, taking all companies listed on the UK stock market - or on world stock markets - together, there has been an overall upward trend in profits (and other figures) over the last 10 years, and over longer periods.

“

SMT maybe soon the managers of SMT will also decide to sell their stakes in the companies you mention because they may feel they have peaked. They will then go buy something else?

In 2009 the NAV for SMT was about 100 pence. Now its about 490 pence.

Where did all that extra value come from ? Is it a bubble? If i buy today and it pops, ill be left holding a decent loss...

”

mostly, it is growth in profits, etc. it's probably also growth in the valuations (e.g. price/earnings ratio) of the companies SMT has held.

they have done better than most, because they've made some good calls (without getting into whether that is skill, or taking on more risk, or luck) over that time. are those gains at risk of being reversed?

SMT could fall very sharply in some market conditions, but that is not so much because it's gone up a lot in the past (after all: some of SMT's holdings have changed over the years), as because it now holds a rather concentrated portfolio, dominated by a few technology shares. in the short term, if market sentiment turns against those companies, SMT's NAV could fall sharply. in the longer term (and assuming SMT's managers stick to their convictions about which shares to hold), market sentiment doesn't matter so much, but if their big holdings aren't as successful (at growing profits, market shares, etc) as they hope, their NAV could also fall.

(and since SMT is at a premium to its NAV, there is also the risk that it could fall to a discount instead.)

“

Leaving aside the normal up and down blips and corrections, is the trend truly always onward and upward? I guess it must be with costs and inflationary feed throughs behind it all.

”

that's right (see above). there are normal ups and downs. and superimposed on that, there is also general inflation + real growth.

Topping up on the winners often means buying high hoping the price may increase. It is abit bit like drip feeding. If the investment is falling back then I'd sell a percentage to liquidise some gains. I'm rubbish at buying low and selling high so I go with the trend.

I'll review my holdings, if there is a particular holding that has dropped, I'll review over the longer term, if its has say dropped 10% over the year I'd jump ship or a percentage of it depending on how it had performed over a longer period. If it had gained 10% over the year, but dropped 1% in the last 3 months , I'd be keeping a closer eye on it with a view to locking in any gains
Theres lots of factors to consider as well , such as market sentiment, wars, general market condtions, elections etc which all contribute to the decision making process.

This is all interesting reading. My portfolio is pretty new and I have not rebalanced as yet but I want to keep things simple. With the dividends received so far I have purchased more of my core funds VSL60/HSBC Balanced etc .. the ones that are likely to be in my portfolio for a long time. For the annual review then I will possibly sell down some of the funds with bigger gains and buy more of the core funds. Maybe my approach is too simple.

This is all interesting reading. My portfolio is pretty new and I have not rebalanced as yet but I want to keep things simple. With the dividends received so far I have purchased more of my core funds VSL60/HSBC Balanced etc .. the ones that are likely to be in my portfolio for a long time. For the annual review then I will possibly sell down some of the funds with bigger gains and buy more of the core funds. Maybe my approach is too simple.

Your post is like mother's milk to me. Your approach isn't too simple, it sounds great to me. You have your core asset allocation dispersed over a broad range of funds that automatically rebalance. You must not be tempted to fiddle, play hunches or panic sell with the others.

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